Low Mortgage Rates with Inflation?
Posted on | March 23, 2009 | 1 Comment
Since 1971, we have never seen a period of inflation with low mortgage rates. This begs the question, what will give in the current economy? Will we see a deflationary period continue as mortgage rates stay at historic lows? This is highly unlikely as the Federal Reserve Bank is printing money at their leisure; will this cause inflation and a subsequent rise in mortgage rates? Or will it be the case that we live in an unprecendented time in American history in which we see an inflationary period with low mortgage rates.
The last time mortgage rates were near the current levels was in the late 1960s and early 1970s. We saw a moderate level of inflation during this time; ranging between 2.78% and 5.84% on a yearly average. There were signs of an inflationary period coming in 1970 as each month showed an inflation rate of over 5%. During 1970, mortgage rates actually increased from approximately 7% to 8%.
As the 1970s continued, inflation was rampant. For any of you who lived during this time, you know prices went through the roof on many commodities. The following data depicts just how excessive inflation was during the period, the first percentage is inflation and the second percentage is mortgage rate levels:
1974 – 11.03% - 9.19%
1975 – 9.20% - 9.05%
1976 – 5.75% - 8.87%
1977 – 6.5% - 8.85%
1978 – 7.65% - 9.64%
1979 – 11.22% - 11.2%
1980 – 13.58% - 13.74%
1981 – 10.45% - 16.63%
As you can see, a high inflationary period was also a period of high mortgage rates. As inflation decreased mortgage rates dropped back to reality after the early 1980s. Since the early 1980s, we have not seen two or more successive years of inflation over 5%. In fact, many economists actually feel that the high unemployment rate along with low consumer spending will cause deflation as business keeps prices low to increase sales. I disagree.
Now that President Obama has enacted a new tax system, it is likely the price of goods will be passed along to the consumer. Not only with this help to with the inflation argument, the Federal Reserve has put the United States in an $11 TRILLION hole. It is very hard to see how the value of the dollar will not plummet. With the falling dollar, inflation is only going to come in time.
So, what is the next step? Do we live in a period of inflation AND low mortgage rates? We definitely live in a time in uncertainty and this may be the most unexplainable aspect of our economy for years to come.
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March 23rd, 2009 @ 8:11 pm
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